Microsoft CEO Steve Ballmer at the Windows 8 launch in New York in October.
Microsoft

In hindsight, 2012 may well be the year that marks the biggest transition in Microsoft's storied corporate history.

That statement might get some argument from Microsoft watchers, who would put the debut of Windows 95 and the retiring of co-founder Bill Gates ahead of 2012 for sea change at the company. But 2012 marked the year that Microsoft decided that basing its business on software alone isn't enough to survive in the evolving world of technology.

Now, as Microsoft chief executive Steve Ballmer says at every opportunity, Microsoft is about devices and services. The company is building devices, such as the new Microsoft Surface tablet computer, that best take advantage of the bevy of new services, such as its SkyDrive Web storage offering, it's creating.

Here's a look back at five key events that helped shape 2012 for Microsoft:

The Windows 8 operating system that Microsoft debuted in October will sell extraordinarily well almost regardless of how well it's made. Within a month of its launch, Microsoft noted that 40 million copies of the operating system had sold. In many ways, Windows is merely about turning on the spigot and letting the revenue flow into Microsoft's coffers.

But Microsoft made a huge bet with this version of its flagship product. The central new feature in Windows 8 is that users can navigate by touching the screens on devices running the operating system. It's an attempt to leverage Microsoft's operating system hegemony into the emerging world of tablet computing, where Microsoft and Windows have lagged.

The gamble is that this operating system looks wildly different from past versions of Windows that computer users know well. They can still flip to the familiar desktop look to which they are accustomed. But Microsoft is pushing users to embrace the tile-based interface it's rolling out across its entire product line.

Windows 8 success won't be judged alone on how many copies Microsoft sells. The true measure of its success will be how well Microsoft is able to carve out a piece of the tablet market and slow the march of Apple and Google in that world. Early indications are that sales got off to a slow start, though that's likely related to sluggish PC sales broadly. Within the next few months, it should become clear how well Microsoft's Windows 8 bet plays out.

2. Microsoft Surface debuts

The big hedge against the Windows 8 tablet bet is Microsoft's new Surface tablet computer. Ever since Microsoft rolled out MS-DOS in 1981, the company has relied on hardware makers to bring its PC operating system to life. In recent years, though, those computer makers have lost mindshare, and market share, to Apple and its innovative industrial design.

So for the first time ever, Microsoft jumped into the PC-making business. The Surface, which debuted at the same time as Windows 8, is a touch-screen tablet with sleek industrial-design looks, and the spare new Windows interface. What's more, unlike iPads, it comes with a keyboard that lets users create content on the device easily.

Of course, Microsoft has made hardware before. The Xbox game console has been on the market more than a decade. It's been selling mice and keyboards for even longer. And it even tried its hand at making mobile phones with the short-lived Kin ONE and Kin TWO.

But the Surface reflects a dramatic change in thinking in Redmond. Microsoft's brass has decided to compete directly with its hardware-making partners because it recognized that they were falling behind Apple, leaving Microsoft to lose ground in a key emerging market.

Inside Microsoft, Sinofsky has long been known as a polarizing figure. He has plenty of fans, particularly many of those who work in his groups, for setting a clear agenda, sticking with it, and shipping quality products on time. His downfall, though, were his battles outside the Windows division. He developed a reputation for marginalizing internal rivals, undermining their efforts to make certain his products weren't burdened by dependencies from other divisions outside his control.

For Ballmer, that became a deal-breaker. Increasingly, Microsoft is counting on cross-division collaboration as it weaves threads to bring its various software, services, and devices together. To compete in the consumer marketplace against Apple and Google, the company needs all of its division leaders working together smoothly. So when Windows 8 hit store shelves, Sinofsky left the building.

4. Windows Phone 8

Rarely has so much noise been made about a product that's been on the market for so long and had so little share. Even while Windows Phone sputters in the marketplace, Microsoft is able to generate buzz for its Windows Phone 8 operating system. And Microsoft needs Windows Phone 8 to breakout if the company is going to achieve the goal of creating an ecosystem of devices and services to counter rivals.

Just days after Microsoft debuted Windows 8, it rolled out Windows Phone 8 in a splashy San Francisco show that featured Jessica Alba sharing the stage with Ballmer. Microsoft is counting on devices from Nokia, Samsung, HTC, and others to help it elbow its way into a market that's dominated now by Apple and phones using Google's Android mobile operating system. And it needs developers, who have created must-have apps for rival platforms, to build them for Windows Phone now as well.

It's a tough slog. Windows Phone currently runs less than 3 percentof all smartphones worldwide, according to IDC. And while IDC is bullish on Windows Phone, it doesn't expect the operating system to become much of a threat to either Apple or Google anytime soon.

5. Office, embracing online

Microsoft was a laggard when it came to composing documents and creating spreadsheets on the Web. And for good reason: Its Office franchise was humming along with massive profits. For years, there was little reason to offer low-cost Web apps that would compete with the packaged software that kept filling Microsoft coffers.

That changed this year. Microsoft debuted Office 365 in June. It's a service that lets customers pay a monthly fee to use Word, Excel, and PowerPoint, as well as server software such as its Exchange e-mail program, its SharePoint collaboration software, and its Lync communications technology. The new services compete with rival offerings, most notably from Google, whose Google Apps for Business has been making inroads with corporate customers interested in online productivity programs.

Microsoft is targeting small businesses with Office 365, tailoring the product and the pricing in a way so as not to cannibalize corporate Office sales. So far, it seems to be working. At Microsoft's annual shareholders meeting last month, Ballmer noted that Office 365 was on track to be one of Microsoft's fastest growing businesses ever.

About the author

Jay Greene, a CNET senior writer, works from Seattle and focuses on investigations and analysis. He's a former Seattle bureau chief for BusinessWeek and author of the book "Design Is How It Works: How the Smartest Companies Turn Products into Icons" (Penguin/Portfolio).
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